By Ameer Ahamad

DOCTRINE OF INDOOR
MANAGEMENT
For understanding the doctrine of indoor / internal management, the
understading of the concept of doctrine of constructive notice is sine qua
non. So a brief introduction of this concept is given here.
THE DOCTRINE OF CONSTRUCTIVE NOTICE (THE GENERAL RULE):Memorandum and articles of associations of a company are
necessary to be registered with the Registrar and once registered both
these become public documents and are accessible to all the persons. It is
therefore duty of every person dealing with a company to inspect its
public documents and make sure that his contract is in comformity with
their provisions. It is immaterial whether that person actually read and
understood the said documents or not. This duty of reading and
understanding the said oprovisions of the Memorandam and Articles of
the company is presumed and construed to have been performed. This
presumption or construction is considered to be Constructive Notice.
Case Law
Oakbank Oil Co. V. Crum (1882) 8 AC 65,71
the person dealing with the company is taken not only to
have read those documents but to have understood them
according to their proper meaning.
Ridley V. Plymouth Grinding and baking Co. (1848) 2 Exch
711
The person is presumed to have understood not merely the
companys powers but also those of tits officers.

PURPOSE OF THE CONSTRUCTIVE NOTICE DOCTINE:This doctrine is the outcome of the need to secure the company form the
outsiders when they look to deceive the company by alleging their
unawareness with the contents of the memorandum and articles and
trying to evade their contractual liabilities or accusing the company of
fraud, as the case may be.

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By Ameer Ahamad
DOCTRINE OF INDOOR MANAGEMENT:An exception to the constructive notice doctrine is the
doctrine of indoor management, as the former protects the
company form outside stakeholders the later protects the
outside stakeholders against the company.
Though once registered the memorandum and articles
become public documents and the person dealing with the
company must have a notice of these documents, however, this
rule of constructive notice is confined to the external
positioning of the company and it is easily understandable
that, the person will have no notice as to how the companys
internal machinery is handled by its officers.Thus, the person
dealing with the company will not be prejudiced even when the
transaction is inconsistent with the public documents if the
irregularities which render the transaction invalid, relate to the
indoor working of the company.
This doctrine is commonly known as the TURQUAND RULE, for it
traces its origin in case Royal British Bank V Turquand (1856)119 ER
886 where:The companys articles provided that the directors might borrow on
bond such sums as may from time to time be authorized by a
resolution passed at a general meeting of the company. The
directors did borrow a sum of money from the plaintiff. The
shareholders claimed that there had been no such resolution
authorizing the loan and therefore it was taken without their
authority. However, it was held that the company was bound by the
loan. The court said that person dealing with a company is entitled
to assume, in the absence of facts putting him on inquiry, that there
has been due compliance with all matters of internal management
and procedure required by the articles.
So, the person dealing with the company is bound to know what he
can know as a public person but, not what is not in his reach and which is
done behind the doors of the company where he cannot access to.

PURPOSE OF THIS DOCTRINE:ameergujjar@yahoo.com

By Ameer Ahamad
The business is a field which requires the protection of all the
contracting parties and good business can only make sure the good
development of the economy and commerce. Though, apparently this
doctrine is for the protection of the persons dealing with the company but
its more important purpose it to promote the investments in business in
order to keep the business and the economy going well.
As Justic Bray said in Dey v. Pullinger Engg Co. (1921) 1 KB 77:The wheels of commerce would not go around smoothly if
persons dealing with companies were compelled to
investigate thoroughly the internal machinery of a company to
see if something is not wrong.
Also Lord Simonds said in Morris v. Kanssen (1946) 1 ALL ER
586,592:The people in business would be shy in dealing with the
companies if they have to check completely the internal
working of the companies.
The investors until and unless they are secured in all respects
never show any tendency to invest money and without investments the
business and simultaneously the economy is always affected badly. The
protection given to the investors under this doctrine is a step to promote
the business and the growth of commerce.

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT:The doctrine of indoor management is not unexceptionable in
all the circumstance, rather, there are certain circumstances where this
doctrine cannot and should not be applied. Like the establishment of the
doctrine, these exceptions are also judicially established, which are as
follows:1-Knowledge of Irregularity
The doctrine of indoor management can be no defense where
the person dealing had the knowledge of the irregularity. This is the
first and foremost restriction on the application of this doctrine.
Meaning thereby that the presumption of irregularity can not be
relied upon by the insiders ie the persons who by virtue of there
position in the company are in position to know whether or not
internal regulation has been observed.
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By Ameer Ahamad
The application of the doctrine of indoor management was refused
on the ground that the person dealing with the company had the
knowledge of the irregularity in Howard V.Patent Ivory Manufacturing
Company, (1888) 38 Ch. D. 1561 and the directors were not allowed to
defend the issue of debentures to themsemlves because they
should have known that the extent to which they were lending
money to the company required the assent of the general meeting
they had not acquired.
Similarly in Morris V. Kanssen (1946) 38 A.C 459 a director could not
defend an allotment of shares to him as he participated the meeting
which made allotment. His appointment was also fell through
because none of the directors appointing him was validly in office.

2-SUSPICION OF IRREGULARITY
As the words in the absence of circumstances putting him on
inquiry were used in the Turquand case, so the advantages of this
doctrine are not available to the person who had suspicion of
irregularity as in this case he is obligated to satisfy himself of the
legality of the transaction and all matters relating to it.
As in Anand Bihari Lal V. Dinshaw & Co, Air 1942 Oudh 417
plaintiff accepted the transfer of companys property from
accountant. The transfer was held to be void. The plaintiff could
have supposed, in the absence of power of attorney, that
accountant held power to transfer companys property.

the
its
not
the

3-FORGERY:Turquands rule does not to apply to forgery. It was clearly said

in Ruben v. Great Fingall Consolidated (1906) AC 439 that it
is quite true that persons dealing with limited liability companies are
not bound to inquire into their indoor management and will not be
affected by irregularities of which they have no notice, but it cannot
apply to a forgery. In this case the plaintiff was the transfree of a
share certificate issued the defendant company. But this was issued
by companay secretary who affixed the seal of company and froged
the signature of two of the directors.

4-REPRESENTATAION THROUGH ARTICLES

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By Ameer Ahamad
The Articles of association generally contain what is called the
power of delegation In order to claim protection under this rule
and under this kind of exception knowledge of Memorandam
and Articles of Association is essential. A person who did not
consult or act according to its provisions cannot be protected.
This concept is applied in different cases differently by the courts;In Lakshmi Rattan lal Cotton Mills v. J K Jute Mills Co,
AIR 1957 All 311 the company was held liable to a loan
taken by the managing agent because the articles provided
for the delegation of borrowing powers to the managing agent
and it was said that the delegation clause was there in the
articles and the person dealing with the company could
assume that powers have been delegated.
But what if the person had not consulted the articles of the
company and had no knowledge of the contents of the
articles? This question was answered in Houghton & Co v.
Nothard Lowe and Wills Ltd, (1927) 1 KB 246. In this
case as well there was a delegation clause in the articles and
contract was entered into by a person (a director) who could
claim the delegation of the powers to him, but the plaintiff
company had not read the articles of association and had no
knowledge of the delegation clause and hence it was held that
the plaintiff company cannot claim the advantage of the
clause of articles which he had no knowledge of at the date of
entering into the contract.
While in Ford Motor Credit Co Ltd V. Harnack (1972) the
presumption of the ostensible authority was held to be a valid
ground for binding the company.
5-ACT APPERENTLY OUT OF THE POWER OF THE OFFICER OF
COMPANY:This exception of the Turquand rule is the one which can
very easily be invoked. It is very clear that if the act of the officer of
the company is such as is apparently out of his power it should not
be relied upon and if relied upon the company cannot be held to be
bound by the act.
A very clear description of this rule was given in Anand
Behari Lal v. Dinshaw and Co. AIR 1942 Oudh 417 where
the plaintiff accepted the transfer of companys property by
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By Ameer Ahamad
an accountant of the company which was apparently beyond
the powers of an accountant and company was held not to be
bound.

CONCLUSION
Companies enter into several kinds of contracts and transactions
with different persons. The laws regulating the companies have never
been able to cover each and every aspect of the companies workings and
the judiciary has always helped through precedents, examples of this
help by the courts of law are the creation of the Doctrine of Constructive
Notice and the Doctrine of Indoor management.
The former one is for the protection of the companies from outside
stakeholders and has always been very helpful for the companies while as
the interests of the investors are also necessary to be protected the
doctrine of indoor management was introduced. These two doctrines
act to balance the protection of company as well as outside stakeholders.

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By Ameer Ahamad

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